Critical Thinking Analysis - Essay Example

CRITICAL THINKING ANALYSIS NUMEBER: Background: The Article under review is basically all about the US Stock market, the companies involved in it. How Public limited companies and private limited companies function within the US market .it also presents a review of how public companies can be taken over and the system overhauled is made into a profit making company under the ownership of private limited companies. How the target firm can be restructured is also described within the article. Blackstone, the Company and its initial public offering that occurred in June 2007 is also highlighted therein the article. This article was published in The Agency, The Atlantic in September 2007. The purpose for me to write this report, is to evaluate this piece of writing analytically that will further illuminate the results of my critical thinking. Further this report is intended to serve the purpose of describing, evaluating and analyzing the arguments presented in the article. This report further should be able to inform the Editorial review board, based on a solid analysis that whether the article is worthy of being published in the journal of ‘Advanced Critical Thinking ‘for businesses and why. The major issue outlined in the article is that of the fact that, with the help of a proper restructuring plan, public limited companies can be turned into profitable firms by taking them into private ownerships and restructuring them. . Furthermore, the Example of Blackstone Company is being discussed herein. The Article also highlights the American approach towards such an issue. It also investigates how Foreign Companies listings on the American stock exchange helps gain valuation premium. Description of the Argument : The Article tends to put forth a question: If the readers think that that a public firm that is to be restructured would be better managed if it would be financed in a better manner. The article outlines the details of Blackstone Company, which is listed with the American Stock Exchange. The Global IPO‘s current position is described. The market in London then in comparison is stated to possess policies and rules that pose lesser personal risk to the directors of companies. How finance experts argue that the American approach is better off is also described briefly. How tighter regulations along with then bring Investor confidence has also been defined and explained. Private equity and the typical Buyout transaction entail hollowing out a public company which is undervalued and restructuring and after a few years selling the company for a profit. The article compares both the American stock exchange and London stock exchange working mannerisms. Detail descriptions of Private equity firms are also outlined. The Blackstone company example basically is provided herein to support by example the arguments entailed in the article. Analysis of the Argument: We will be analyzing the arguments put forth herein. The first argument that the articles puts to its readers is that of deciding and analyzing if undervalued companies who are listed with the stock exchange can become profitable ones, through restructuring y privately owned companies. Secondly they argue that the typical buyout transaction is what is defined in the previous lines. ‘Most going private transactions are financed with borrowings banks or other institutions. In the typical transaction, a company’s assets are used as collateral for the debt and its cash flows are used to service it. Management is almost always a participant in going private transactions, along with other parties contributing financing or other buyout expertise. Will this structure work for you? This 7 page white paper discusses Deal Structure, Process Flow, Due Diligence, virtually everything youd need to brush up on if considering this option. Dont miss out on this integral primer! Deal Structure Most going private transactions are financed with borrowings banks or other institutions. In the typical transaction, a company’s assets are used as collateral for the debt and its cash flows are used to service it. Management is almost always a participant in going private transactions, along with other parties contributing financing or other buyout expertise. Going private transactions can take a variety of forms, but usually have a common theme. Generally, the transactions result in an ‘affiliate’, either an existing major stockholder or a management group, acquiring all of the stock of the public company. Equity funding for such corporate purchases is often provided by a sponsor (typically private equity funds that invest on behalf of institutions and wealthy individuals). Debt financing is provided by commercial banks or through issuance of high yield debt, or so called ‘junk bonds’. Until recently the junk bond market had been in poor shape, making the cost of doing a corporate purchase prohibitively high. But enthusiasm for junk bonds has been on the rise, with investors putting more money into high-yield funds like never before. As a result, spreads -- the difference between Treasury yields and junk bond yields -- have contracted sharply. And because Treasury yields have fallen, the absolute yields on junk bonds have fallen sharply as well. An ideal transaction would be compromised of the following: Cash on the Balance Sheet Attractive Purchase Price Strong Projected Cash Flow Adequate Debt Capacity Strong Management Capabilities Attractive Industry Fundamentals Strong Market Position Discernible Exit Strategy (4-7 years) (2004 - 2007 | Public Company Management Services, Inc.) Private equity firms tend to bring in a lot more than just their firms presence. They tend to bring in discipline and expertise. They are further believed to bring in debt along with them. ‘The investors are usually willing to put a small amount of their total funds into investments that are considered high risk but potentially high reward. They are high risk because of the amount of debt employed relative to the amount of equity, but once the debt is paid off, the profits can be huge. The terms private equity and venture capital are used interchangeably in the City to describe deals that involve buying companies listed on the stock market and taking them into private hands. (In the US venture capital tends to be used to describe investment in early-stage and expanding companies.) The deals are usually associated with high levels of borrowing - known as leverage - relative to the amount of equity in the business. (Treanor and Macalister, the Guardian 2007) The article puts forth a very realistic approach and occurrence of instances. Mostly because the aim of the article seems to are two fold. One to create awareness amongst the readers as to how, restructuring of undervalued companies be done, and secondly how majorly American and London markets work. Evaluation of the Argument: ’ The big difference between private equity and stock market listed companies is that the private equity firm is the only owner of the business - while investors in stock market listed companies only influence rather than control them. Private equity investments are said to grow faster than stock market listed companies. Over the past 10 years, the best buyout funds have outperformed stock market indices. Some of this is due to the leverage and has prompted analysis by Citigroup into whether simply buying a stock and increasing the size of your investment by borrowing money can replicate private equity returns. The answer is sometimes’ (Treanor and Macalister, the Guardian 2007) ‘Like each one of us, a company experiences a life cycle - that is, different stages of growth - which require capital in varying amounts and from different sources. The stages of a companys life can be plotted on a "risk continuum". Typically, a very young company with no revenue and no earnings is highly risky from a funding point of view. (To learn more, read The Stages Of Industry Growth.)This sort of business usually cant afford to borrow, so capital must be obtained from friends and family, or individual "angel investors". As a company matures and becomes profitable, however, its risk profile diminishes. By the time a company is well established, it can usually fund operations inexpensively with a mix of debt and equity securities. Private equity comes into play at different points along the risk continuum. Private investors can include institutions (pension funds, university endowments, insurance companies, etc) or individuals (high net worth families, friends and relatives). Private equity also refers to leveraged buyouts (LBOs), mezzanine debt, private placement loans, distressed debt and funds of funds.’ (Private equity an Trendsetter for Stocks, Stephanie Loiacono , CFA , September 2007 ) Conclusion of the Argument: It can be concluded by the above evaluation of the article argument that, there is a major difference between Private equity and the listed companies. As described by the author both the markets in America and London have distinct ways of functioning in this regard. Thus it can be concluded that the arguments presented in the article herein, are persuasive. And Blackstone Company’s stance stands true. The last ten years of the stock market have brought under observation a lot many ideas and modes of operation in regards to public and privately owned companies . Recommendation: The article can be published but with minor editing, and a more detailed presentation of the views, presented herein. Private Equity and the Individual Investor ’Private capital is illiquid and usually involves high amounts of leverage, which is a risky combination for the individual investor. There are limited ways, therefore, for a retail investor to play safely in the private equity markets. To participate in private equity or venture capital partnerships, an investor must be "accredited". For example, an accredited investor enjoys net worth, either individually or jointly, in excess of $1 million. For investors who are less well-off, there is the option of exchange-traded funds (ETFs) - the Power Shares Listed Private Equity ETF, in particular. This ETF is designed to replicate the Red Rocks Capital Listed Private Equity Index, which includes more than 30 publicly traded companies that invest directly in private equity. Unlike straight private equity investments, the Power Shares ETF provides liquidity and transparency. Moreover, proceeds can be reinvested back into the ETF, which is rarely possible in a pure private equity investment. Even if you cant participate directly, the power of private equity in the market can boost stock prices by reducing the total domestic stock available - which may be good for the overall value of your portfolio. Venture capital is just one form of private equity funding thats available to companies at various stages of their life cycles. Moreover, private equity and public equity take turns in cycles over time as the key engine driving capital market valuations higher. Investors should be able to recognize these cycles and understand the impact on their portfolios’ (Private equity an Trendsetter for Stocks, Stephanie Loiacono , CFA , September 2007 ) Reference List: Treanor and Macalister, the Guardian 2007 (Private equity an Trendsetter for Stocks, Stephanie Loiacono, CFA, September 2007) Going Private: How does it work? Public Company Management Services, Inc. 2004 - 2007 | Read More